Microfinance’s Growing Pains
- Posted by: Andrew Price
- on September 20, 2007 at 6:44 pm
Crash course time, readers: microfinance.
It’s granting tiny loans to people in poverty. These loans are almost always repaid and the idea is that they make entrepreneurs out of people living hand-to-mouth. It’s like a smallish trampoline made of money that allows you to safely walk the tightrope of poverty (see illustration).
It’s been all the rage ever since Muhammad Yunus won the Nobel Peace Prize for his Grameen Bank in Bangladesh.
Microfinance institutions have exploded across the developing world. Kiva’s one of them. In this video Nicholas Kristof goes to Kabul to visit his “business partner,” a baker he probably gave $50 to through Kiva, and demands interest in the form of delicious bread. Kiva’s a success story and its growth has been impressive.
But microfinance might be getting ahead of itself. There are four microfinance lenders under investigation in Uganda alone. A new Harvard Business Review piece argues it’s time for more scrutiny.
Harvard Business Review: buzz-kill or voice of reason?
We got the tip from Philanthropy 2173.
Graphic from ybpguide.com.
DISCUSSION: 1 Comment
If microfinance is to enter the 21st century’s world of capital markets, it must take heed of critical evaluations and modify just as any other financial system does. Keeping microfinance under the careless sunbath of recent idealism will not help it develop into a sustainable, adaptive, world-wide financial system. Rather than letting this idealism eclipse pragmatism, microfinance institutions should read HBR’s article carefully if they are to become promising investments in the private sector.
And for investors, public and private: detailed evaluations of those institutions in which you are investing is key if the most reliable and best performing are to be singled out and further developed. Treating microfinance institutions as charitable organizations rather than as sound business enterprises – writing careless checks rather than calculating an investment – is against the market-based approach that Yunus intended. Public investors should especially consider HBR’s closing recommendations, most important of which is a country’s current business environment: has a country created an environment conducive to the establishment of businesses and development of the private sector? Do laws force potential entrepreneurs to wait hundreds of days rather than a week to register their business? Ultimately, if the macro framework isn’t established, micro-enterprise will never develop beyond that: micro.
While HBR’s critical assessment may seem rough, the real world of finance isn’t cuddly. If microfinance institutions want real legitimacy in the eyes of future investors and seek to grow out of the world of dependent charity and into the world of international finance, then they would do well to learn from this critique and the many to come. Honesty, after all, is best.